Mitsi Inventory Systems, Inc., has announced a rights offer. The company has ann
ID: 2382681 • Letter: M
Question
Mitsi Inventory Systems, Inc., has announced a rights offer. The company has announced that it will take three rights to buy a new share in the offering at a subscription price of $39. At the close of business the day before the ex-rights day, the company’s stock sells for $60 per share. The next morning, you notice that the stock sells for $52 per share and the rights sell for $3 each.
A) What price should the stock sell for ex-rights? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
B) What is the value of the rights? (Do not round intermediate calculations.)
C) Are the rights underpriced or overpriced?
Explanation / Answer
A)Ex-rights stock price = (3 * 60 +39)/4=54.75 B)The value of the right is the difference between the old share price and the “new” share price Value of rights= Old price - new price = 60-52 = $ 8 c) Rights are under priced by $ 5.25(60 - 54.75)